Episode Transcript
[00:00:08] Speaker A: Welcome back. We just saw that Dubai is sitting at 54 of its normal cargo throughput at the moment. That tells you something about what has happened to a hub that our next guest spent nearly 28 years building. Ram Menem joined Emirates in 1985 and served as a de facto head of cargo until 2013. He helped build Emirates Sky Cargo from the ground up and was central to making Dubai one of the great air cargo hubs of the world. Ram, welcome to Air Cargo Impact.
[00:00:40] Speaker B: Thank you, Mike.
[00:00:41] Speaker A: Ram, the.
The geographic advantage that made Dubai and these other regional hubs so powerful, being that midpoint between Asia, Europe and the Americas, has become a vulnerability almost overnight. With. What's your take on what this jolt of the system means for the region and for those hubs that have been prospering?
[00:01:02] Speaker B: I mean, yeah, you can't get away from the geographical, the geocentric advantage. I mean, if you just open up the map within 14 to 18 hours, you can get anywhere. So you can go anywhere to anywhere with one stop in Dubai and the landmass that you have, that is what gives us the, gives Dubai the advantage. It's not only east, west, it's got north, south, don't forget Africa.
The African continent is a huge continent and lots of countries there are all landlocked. So they tend to depend on the air cargo and transportation as a whole for their growth.
So that proposition is probably the, the biggest plus factor. And it's not only Dubai, any of the airports within that line there you have, starting from Muscat, going right up to Istanbul, they all have the same kind of advantage.
But in Dubai, of course, what we did was when we started the airline, we looked around, it was already a trading hub. They were using the old D to go up and down. And plus you had Saudi Arabia, which is a pretty large market in itself.
And so the Gulf was basically an import destination, basically purely because, I mean, they had nothing growing there or being manufactured there.
And that gradually changed. I mean, as we created this hub, it was the same thing for passengers. I mean, people were just transiting Dubai. It was just a fuel stop for a lot of the airlines which were already operating there. But when we went up there, when we started the airline and we looked around us, I mean, we had probably the best beaches around in six hours flying anywhere. Plus we had the Indian subcontinent, which was about 2.4 billion people at that time.
I don't know what the numbers are right now. This is going back over 30, 35, 40 years back.
So we started building on that.
So it was just not the air cargo. At the same time, while we were building the air side of the business, Jabal Ali port, though Dubai already had a very, very efficient port in Sheikh Rashid. But they then decided to build the Jabal Ali because as the ruler of Sheikh Mohammed said, you build them big, they will come.
And the last thing that you can do, and I always say this, if you open the floodgates, you better be ready to handle the water because if you can't handle it, it'll destroy you.
So everything that was happening in Dubai was in sync.
It's not only the cargo side of, was also the passenger side of it. And the trade, basically, because it was an import based market, there was plenty of capacity going out and that sort of catalyzed the sea air movement.
So gradually you can see, I mean, basically sort of building up on that. And then Jebel Ali, instead of just having the port, created this huge free zone where initially people started stockholding. It was a distribution center for the Africans. And Dubai thrives on three principles. Free skies, free trade and free open skies.
And underlying that was free movement of currency. So all the ingredients were there for us to build.
So all we did was we layered the foundation together.
The entire of Dubai working as Dubai Inc.
And that's how we started building. And as Emirates started expanding, we were building in more and more capacity coming in. In fact, we were at that stage realized. And the success of Dubai is also the open skies.
Because on itself, Emirates could not handle the growth.
It had to make sure that the others grew alongside Emirates.
So again, when we were creating that hub, we were ensuring that there is enough capacity to grow. And that was the floodgates example, because we needed the water to be taken out, so we needed the flow to be taken out and the flow to be brought in too.
So based on that, we layered it. Layered it, layered it. And there was always, I think the first Gulf War was the one that really, truly taught us crisis management.
As the war was going on, we never stopped operating. Every other airline stopped operating into Dubai and the region, but we kept on operating.
So that gave us a lot of experience in dealing with the crises.
So one of the things that Dubai as a whole, not just Emirates, not just the port authorities, Dubai as a emirate. And when I'm saying Dubai, I'm typically talking about UAE as a whole. They were creating business continuity plans. And there were solid business continuity plans they were building up.
So come the Gulf War one, then we had the Gulf War two, then we had the Sars in the Far East. And then we had the economic crisis in 2008, 2009. These were all learning points. But the business continuity program was such they were able to bounce back very, very quickly. And that is exactly what is going to happen today.
Now, if you actually look at it, the whole conflict, which is a very senseless conflict as such, I mean, in my opinion, it harmed the entire of the Gulf, the allies, as much as it was hurting Iran, okay? But the very fact that they continued on and their defense systems were such that they could take care of all the incoming missiles and stuff like that, they're being neutralized. I think what, 98, 99% of the missiles were neutralized. I mean, to the extent event, the World cup horse race that happened in the last Saturday of March went on full on, I mean, the confidence of the people living there, although a lot of the tourists stopped coming there, but the people living there were carrying on as normal.
So this is why I think as this crisis is over, the investor confidence in the region is going to be very, very high.
[00:08:04] Speaker C: Hey, Ram, let me, let me jump in real quickly because I think, you know, this is an amazing history lesson, you know, for, for those who don't understand sort of how this whole region was built up and the role that the airline played, right, in getting us to where we are today. But, but let me ask a sort of an. I think this is an important question here, and I need to say before I ask it, it's great to have you on the show because I remember when I was a young executive at United, you know, running that division, you really took me under your wing. You taught me so much, you know, and we're going back where I'm dating myself, we're going back, you know, 25 years. And it was really, really a pleasure. And thank you so much for everything you did for me over the years. But I'm very curious, okay? Because, you know, take, let's just take Emirates in Qatar, for example. They're not just airlines, right? They're the backbone of belly cargo capacity on some of the most important trade lanes, right? So just think about the belly piece of this. And we all know that 50% of cargo moves in the bellies of passenger airplanes on a global basis. But that belly network is heavily dependent on people's belief, right? Passengers belief that Dubai, Doha, Abu Dhabi, all of these places are safe transit points for them. They can move through there with ease. They can visit Dubai if they feel like it on their way in or out. This perception of These Gulf countries as being insulated and ultra safe has been somewhat shattered by this war. And given how the Iranians have responded, my question to you is, is that how long does it take after the shooting stops, Right.
For passengers to overcome what has been a very traumatic global situation?
And what sort of impact does that have on belly capacity in particular? Leave freighters out of the equation for now.
[00:10:01] Speaker B: Yeah, I just want to bring in another dimension. It was just not the belly spaces. And when you're talking about belly spaces, you're generally talking about wide bodied belly spaces. And on top of that, the advantage with the passenger frequencies, for example, Emirates and Qatar, I mean they have this multiple frequencies going into west as well as the east.
So I mean they were all freighters in disguise. I mean, when you look at the 777 passenger airplane, the Dash 300, they are freighters in disguise. So there was this tremendous amount of capacity that was coming in. And the reasons that freighters were added was there were feed imbalances.
And that's why these freighters initially were added as supplemental capacity to passenger bellies.
And then as they started going longer haul, it started networking your freighters. And that is what between Qatar and Emirates and Etihad and Turkish. To a certain extent that shifted the center of gravity of the world, air traffic into the Middle East. And it was just this crisis which exposed how much the world is reliant on the capacities of these gulf 3 and the ones around it. Now Riyadh is coming up. They're going to do very similar things to what is adding on more capacity. Okay, what's going to happen right now a lot of the passengers have disappeared, but it's matter of time. But now the record, the very fact that during this crisis the whole of the Gulf countries, they managed to weather the storm very nicely, creating it, saying that it's still a safe place to transit.
And those who were stuck in the whole of the Gulf area, they were very well taken care of. The word of mouth in itself is going to be a huge publicity for the entities in the whole of the Gulf and Middle East.
Now what's going to happen? How long is it going to take?
Memories are generally very short as we have seen over the past crisis. This is not the first one and this is not going to be the last one.
Very quickly what the Gulf carriers could do is they could take pricing action that will start bringing the flow back.
The network that they have created, all these carriers have created is so potent. I mean, you go from New Zealand to Santiago To Chile with one stop in Dubai.
That's huge. The economies of scale that they have is allow them to operate at a lower cost and that is passed on to the customer. I mean all these carriers against all this myth that they are being subsidized, they are not, they are standing on their own feet.
Why? Because they have the production, they have the inventory that they can use. Because at a certain stage your cost starts going down, your as the volumes go up. But then again you have to be careful, I mean that you don't start getting the diseconomies of scale. But they are very, very good at managing the diseconomies of scale.
[00:13:34] Speaker A: Rabbi, you saying the belly holders all going to come back because if they have to, they'll use pricing as soon as this is over. Is that your point?
[00:13:42] Speaker B: They are all, you know, on a limited basis. They never stopped even during this crisis. They were operating and it was interesting that Emirates, I mean apart from using the freighters, the dead time on the passenger airplanes, they were using the passenger airplanes as freighters.
So they kept the capacity on. Okay, it was restricted, but capacity is still there.
And as now as they start operating normally, it will just come back and the market is very fluid. I mean you put the capacity right. Capacity and the power of the network that they have created is very, very strong pool.
[00:14:27] Speaker C: Yeah, I agree with you. Having worked for two big network carriers, the power of the network is very important. And I think that, I think overall you're quite bullish that the passengers are going to return and you know, we're going to get back to some sense of normalcy. You know, the question is how long that takes. I guess is a little bit anybody's guess. You know, one comment you made there that I'll just touch on really quickly and I'm going to ask you a very quick question after that is, you know, the idea of using pricing is great to attract passengers back to Dubai in the, in the face of $5 a gallon jet fuel. It's a pretty tricky equation.
And like you said, these carriers now stand on their own two feet. They don't get subsidies, etc. And so that's just a tricky balance. And it looks like these carriers may need to invest heavily to get the passengers back. Now let me ask you one quick response from you. I'm curious.
You mentioned a lot of the other crises that you dealt with over the years. Gulf War 1, Gulf War 2, 9, 11, SARS, et cetera, financial crisis. Where does this rank in terms of just give Me, give us an idea, where does this rank in terms of everything else you've dealt with over your career when it comes to a crisis?
[00:15:50] Speaker B: I would put this as number two.
I think the biggest threat was the COVID which completely brought down all the capacity around the world.
Now I'm talking in the world context and I would rather put this thing as number two for the region.
Yeah, I think this goes on.
[00:16:13] Speaker C: Yeah, yeah, no, no, I think you're right and I appreciate that perspective because if you also look how the markets have reacted, if, whether it's Wall street or the European or the Asian markets have reacted, the response have been far more muted with this crisis than with COVID which sort of destroyed trillions and trillions of value in, in, in companies around the world. So I, I would, I would agree with you and I appreciate, you know, that, that perspective. I do have one last question for you and then I know Mike, Mike has a, as a follow up when, when you're a, A for forwarder, right. And you're making routing decisions right now, right. And you're just trying to deal with the crisis today.
Some of them are building alternate routes. They're establishing new relationships with carriers, bypassing the Gulf because they have to capacity is still down 50%. At what point do you think forwarders potentially find a different solution to their shipping needs? And like, oh, I don't need to go through the Gulf anymore. I found another option for myself. I'm curious, I don't think you believe this is going to happen or have a long term impact. I'm reading your mind a little bit, but I'm curious what you think about that.
[00:17:30] Speaker B: I think there will be an effect.
I would separate out two.
One is the ocean, one is the air side of it. Air side will have absolutely no problems in coming back very, very quickly.
The ocean side is going to be a bit more of a challenge depending on, on what happens in the state of Hormuz if they start levying Thor.
It is going to be a challenge for the merchant ships.
But the other thing is that there are two choke points at the moment. One is the state of Hormuz and the other one is the Babel Manda, the entry into the Red Sea. Now both of them being challenged. A lot of the shipping is not going around the Horn of Africa.
So for them to go Sri Lanka onwards in the deep sea, deep ocean, it's probably faster than coming via the Gulf area. But at the same time, Gulf is a huge market in itself.
So once this is over, some of those capacities will start coming back into the Jabalali area.
Pretty sure all the ports out there are going to incentivize their movements from there. And the Gulf, you know, the, the creation of that hub in the Gulf area is so potent, you know, this is this whole episode of this Gulf conflict.
I'll call it a Gulf War iii. It was just have a small dent, it'll come back.
[00:19:11] Speaker A: I've got a little follow up question for you on that Ram, just to finish up. You talked earlier about the symbiotic relationship or the dual pillars that helped you, helped you build up Emirates in Dubai and that was that relationship with Jebel Ali as a free trade zone.
We've seen similar hubs built up in Qatar. We've got Khalifa down in Abu Dhabi. Saudi Arabia is doing similar sorts of processes. Are you saying that if the Strait of Hormuz wasn't to open again, that that would then affect that second pillar? That all these ports and these free trade zones because the transshipment status would be affected slightly? I mean, there'd still be the import traffic, but the transshipment element of it might be less attractive and that would then maybe have a knock on effect on, on the region's economic growth. And maybe also on the air cargo side.
[00:20:01] Speaker B: No air cargo side, there is no two things that it'll just continue to grow purely because the world is short of capacity, period.
That's the situation. And they will also grow because the shipping is under threat.
And then you look at the supply chains in itself now more and more inventory is not being held on land, they're just being manufactured. It's just in time. Manufacturing of inventory. Inventory is only produced when it's needed. So it needs to get to wherever it needs to get to very, very quickly.
But the ocean side, it will be slower to come back because the logistics on that side is a lot more sensitive at this stage because of the Iran, the Strait of Hormuz, all that situation. But the fact remains that being a big market in itself, those vessels will come back, but it'll take a bit longer than what it's taken on the air side of the business.
So I would say if the state of Hermes will open freely now that there's no more danger, no more threats, I think it would probably take about six to eight, nine months, whereas air cargo would probably take about a month in normalizing, provided the capacities all come back. And it's not the capacities of just Emirates, Qatar or Etihad or Saudi Arabia. Saudi Arabia, the others have to also come in at the same pace as Emirates has. And they will.
It's a big market.
Nobody can ignore that market anymore because it's so potent.
[00:21:51] Speaker A: So Gulf War 3, temporary setback, not existential crisis. Ram Menon, thank you very much for joining us on air cargo unpack today.
[00:21:59] Speaker B: Thank you very much for having.
